Wednesday, October 20, 2010

Eaton's (ETN) Combination of Domestic Cost Cutting and Foreign Sales Displays the Power of Multinational Industrials

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I've called U.S. multinationals the new masters of the universe for quite a while; even before the Great Recession the trend of outsourcing labor (reducing costs) and increasing foreign sales, with a weak U.S. dollar was a mega trend.  Now these catalysts have only accelerated... of course there was a hiccup between 07 and now when global commerce took a hit, but in retrospect this only helped these companies 'right size' in much more dramatic fashion, expunging U.S. labor in a much more convenient manner than would otherwise be viable.

Now, despite revenue that might be lower than a few years back, profitability is surging and stock prices in many cases are headed back to (or already achieved) all time highs.  As a pure stock speculator, one must applaud - as an economist or American citizen, these trends are definitely a mixed bag.  In a larger sense this is the push-pull of the stock market - what is good for corporate bottom lines is not so good for the laborers of the country.   When the U.S. was more of a closed system these 2 areas would intersect more, but we have reached the point where domestic economic activity is becoming an afterthought for this subset of multinational masters of the universes.

One such company is conglomerate manufacturer Eaton (ETN) - a name we watch closely here as it is not a mega cap like a General Electric (GE) or United Technology (UTX) so still an "investable" size with decent growth metrics.  The company reported an excellent quarter this morning, similar to what Parker Hannifan (PH) put out yesterday.  This trend should bode well for FMMF favorite Cummins (CMI) - which was in Chindia well ahead of most American companies - as well.  These are 'safe' ways to play global growth - especially of the Asian kind - from a domestic angle.  One can only imagine the prospects for these companies if the U.S. economy ever gets its act together.

ETN & PH almost back to all time highs




CMI - long gone!



Some blurbs about the quarter for Eaton

Via AP:
  • Diversified manufacturer Eaton Corp. reported a 39 percent surge in its third-quarter profit Wednesday as global revenue increased almost 18 percent over the same period last year when the entire industry was hammered by the recession. 
  • Chairman and CEO Alexander M. Cutler said the results reflect the continued rebound in the markets that Eaton serves as well as "the benefits of the substantial changes in our cost structure implemented over the past two years."
  • Eaton makes drivetrain and powertrain systems for the auto industry, electrical components for power systems and fuel, hydraulics and pneumatic systems for the aviation industry.
  • The company, based in Cleveland, said its net income rose to $268 million, or $1.57 per share, in the July-September period, up from $193 million, or $1.14 per share, a year ago.  Revenue rose to $3.57 billion from $3.03 billion a year ago. Excluding acquisition integration charges, operating earnings were $1.60 per share in the third quarter. That was well ahead of analysts' expectations for adjusted earnings of $1.38 a share on $3.4 billion in revenue.
  • The biggest revenue gains in other businesses were 39 percent to $583 million for hydraulics and 33 percent to $534 million for trucks.
  • Reflecting the rosier outlook, the company raised its full-year earnings guidance by 10 percent. Eaton expects fourth-quarter income per share of $1.50 to $1.60. For the year, Eaton expects earnings of $5.30 to $5.40.  Analysts expected $5.09 a share for the year.
  • Eaton said weakness persisted in North American nonresidential construction in the quarter, but was offset by demand from industrial markets
  • European and Asian electrical markets grew at a faster pace, the company said, and recent acquisitions drove record margins at its electrical international segment.


  • The company now sees end markets increasing 10 percent in 2010, compared with an earlier forecast of 8 percent, driven by growth outside the U.S.   Eaton today boosted its forecast for global demand for hydraulics, now seeing markets increasing 31 percent, compared with its previous estimate of 26 percent.
  • Hydraulics sales climbed 39 percent.  “Hydraulics are used in everything from transmissions and power management to industrial,”Brian Rayle, an analyst for Cleveland-based Northcoast Research who has a “buy” rating on Eaton stock, said today in an interview. “We’re not at the point where people are opening new factories but if you want to get more efficiencies using new hydraulics, new pneumatic systems in factories, there’s a good way to get productivity without a lot of capex.”

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